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Wednesday, May 8, 2024
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Case Studies |
Greenco Inventory Gift II
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Case:
Bill and Clara Green consider themselves very fortunate. Bill was born in Estonia. When he was an infant, his parents immigrated to America. He attended high school and State College on the East Coast. After he received an engineering degree, Bill worked for two different companies on the East Coast. He met Clara, married and had two children, Susan and Harry.
Bill worked for companies that produced different types of industrial control systems. One day, he started working on a control system that would measure various kinds of smokestack emissions. Since the Environmental Protection Agency (EPA) was now starting to regulate smokestack emissions, Bill thought it would be a great opportunity.
Bill quit his job, took their life savings and started a manufacturing operation in his garage. He soon hired another engineer and a secretary and set up a C corporation named Greenco, Inc., to produce instruments to measure smokestack emissions. Over the years, Greenco has flourished and grown, and now has 30 employees with customers throughout the nation.
When asked whether Greenco is a good business, Bill responds, "It's a great business. The power companies buy our probes to measure the emissions in their smokestacks. Then the EPA changes the rules! So our customers need to buy updated probes."
A state university has approached Bill and indicated an interest in the probes manufactured by Greenco. The state university conducts a research program managed by professors and students of the environmental engineering department. The research program attempts to evaluate the effectiveness of various types of pollution control devices. These university professors believe that the probes manufactured by Greenco would be very useful as part of the research instrumentation necessary to do the environmental testing.
Question:
Bill gave the university probes with a cost basis of $2,000 and retail value of $20,000. What deduction can Bill take?
Solution:
In most circumstances, a gift of inventory qualifies for a deduction at cost basis. Sec. 170(e)(1). However, if a gift is made to an educational institution for the conduct of scientific research, a higher deduction is available.
For a qualified research contribution, the deduction is the lesser of twice the cost basis or one-half of the appreciation plus the cost basis. In this case, twice the cost basis of $2,000 equals $4,000. The appreciation is $18,000, and so one-half of the appreciation is $9,000. $9,000 plus the cost basis equals $11,000. Because the $4,000 "twice the cost basis" amount is the lower amount, this is the value of the charitable deduction that may be claimed by Greenco.
Bill is delighted with the result. He has been able to assist the ongoing development of new methods to reduce pollution and Greenco received a substantial charitable contribution.
Greenco qualifies for this enhanced deduction because it constructed the property for the university and the gift occurred within two years of the date of completion of the probes. In addition, the state university professor provided a letter to Greenco and indicated that the probes will be used in the research project. Finally, the letter states that no cash, goods or services were provided to Greenco in exchange for the donation.
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